LAW 1: MODULE 2

Republic of the Philippines

University of Rizal System
Province of Rizal
www.urs.edu..ph
Email Address: ursmain@urs.edu.ph

Business and Industry

Law 1: Business Law
First Semester, Schoolyear 2020-2021

 MODULE 10: Defective Contracts

Introduction

A contract with all the valid requisites constitutes a valid contract. Should any of the
requisites prove to be defective or missing, the result is a defective contracts. Defective
contracts produces different effects which range from void ab initio to ratifiable contracts.
Certain defects stem from the condition of the essential requisites of a contract while
others arise from failure to comply with formal requisites.

Module Objectives

A. To understand how a contract can become defective;

B. To distinguish the different defective contracts; and
C. To analyze the effects of a defective contract.

Discussion

RESCISSIBLE CONTRACTS

Art. 1380. Contracts validly agreed upon may be rescinded in the cases
established by law. (1290)

Rescissible contracts are those validity agreed upon because all the essential
elements exist and, therefore, legally effective, but in the cases established by law, the
remedy of rescission is granted in the interest of equity.

They are valid and enforceable although subject to rescission by the court when
there is economic damage or prejudice to one of the parties or to third person. In a
rescissible contract, there is no defect at all but by reason of some external facts, its
enforcement would cause injustice.

Meaning of Rescission
Rescission is a remedy granted by law to the contracting parties and sometimes
even to third persons in order to secure reparation of damages caused them by a valid
contract, by means of the restoration of things to their condition in which they were prior
to the celebration of said contract. (see 8 Manresa 748-749.)

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Requisites of Rescission
The following are the requites before the remedy of rescission may be availed of:
(1) The contract must be validity agreed upon (Art. 1380);
(2) There must be lesion or pecuniary prejudice to one of the parties or to a
third person (Art. 1381.);
(3) The rescission must be based upon a case especially provided by law (Arts.
1380, 1381, 1382.);
(4) There must be no other legal remedy to obtain reparation for the damage
(Art. 1383.);
(5) The party asking for rescission must be able to return what he is obliged to
restore by reason of the contract (Art. 1385, par. 1.);
(6) The object of the contract must not legally be in the possession of third
persons who did not act in bad faith (ibid., par. 2.);
(7) The period for filing the action for rescission must not have prescribed. (Art.
1389.)

Art. 1381. The following contracts are rescissible:

(1) Those which are entered into by guardians whenever the wards whom
they represent suffer lesion by more than one fourth of the value of the
things which are the object thereof;
(2) Those agreed upon in representation of absentees, if the latter suffer the
lesion stated in the preceding number;
(3) Those undertaken in fraud of creditors when the latter cannot in any other
manner collect the claims due them;
(4) Those which refer to things under litigation if they have been entered into
by the defendant without the knowledge and approval of the litigants or
of competent judicial authority;
(5) All other contracts specially declared by the law to be subject to
rescission.

Cases of Rescissible Contracts

Articles 1381 and 1382 enumerates the FIVE (5) types of rescissible contracts.

(1) Contracts entered into in behalf of wards. - A ward is a person under

guardianship by reason of some incapacity.

EXAMPLE:
G is the guardian M (minor). G sells the property of M worth P20,000
for only P15,000.

The contract of sale cannot be rescinded because the lesion (see Art.
1355.) is not more than one-fourth. However, if the property is sold for less
than P15,000, M can rescind the sale by proper action in court upon
reaching the age of majority.

(2) Contracts agreed upon in representation of absentees. -An absentee is a

person who disappears from his domicile his whereabouts being unknown,
and without leaving an agent to administer his property. (Art. 381.) Likewise,
the absentee must suffer lesion by more than one-fourth of the value of the
property object of the contract to entitle him to the remedy of rescission.

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It must be noted that paragraphs 1 and 2 refer only to transactions by
guardians and absentees’ representatives. As a general rule, lesion does not
invalidate a contract except only in case specified by law. (see Art. 1355.)

(3) Contracts undertaken in fraud of creditors. - In order that fraud of creditors

may be a valid ground for rescission, the following requites must also be
present.

(a) There must be a an existing credit prior to the contract to be rescinded,

although it is not yet due or demandable;
(b) There must be fraud on the part of the debtor which may be presumed or
proved (see Art. 1387.); and
(c) The creditor cannot cover his credits in any other manner, it not being
required that the debtor be insolvent, ( see Art. 1177.)

Where the fraud charged is not the one used to obtain a party’s
consent to a contract (Art, 1338.); it can only be a fraud of creditors that gives
rise to a rescission of the offending contact. (Goquiolay vs. Sycip, 9SCRA
663.)

(4) Contracts which refer to things under litigation.

EXAMPLE:
A sues B for the recovery of a parcel of land. In this case, that land is a
“thing under litigation.”

If, during the pendency of the case, B sells the land to C without the
approval of A or of the court, the sale is rescissible at the instance of A in
case he wins in his suit for the recovery of said land unless C is in legal
possession of the land in good faith. (Art. 1385, par 2.) A, however, may
protect his right filing a notice of lis pendens. (Sec. 14, rule 13, Rules of
Court.)

If the actions involves personal property, A may petition the court for
the insurance of an order of attachment (Sec. 1, Rule 59, ibid.) to place the
property in custodia legis.

(5) Other instances. -Some of the specific contracts subject to rescission are
as follows:

Under article 1539, the vendee may exercise the remedy of rescission
when the lack in the area of the real estate sold be not less than one-tenth
of the stated, of the price agree upon. (see also Arts. 1526, 1534, 1542,
1556, 1560, 1567, 1599.)

Art. 1382. Payments made in a state of insolvency for obligations to whose

fulfilment the debtor could not be compelled at the time they were effected, are
also rescissible. (1291)

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Payment made in a state of insolvency
The present article speaks of “payments” not exactly of a contract. A debtor is
insolvent if he does not have sufficient properties to meet his obligations. It is not
necessary that the debtor’s insolvency be judicially.

Under this article, the payments must have been made “for obligations to whose
fulfilment the debtor could not be compelled at the time they were effected.” Included in
the obligations referred to are not only those that have not yet become due and
demandable (i.e., obligations with a suspensive period or condition) but also those which
cannot legally be demanded such as natural obligations and those that have prescribed.
(see Asia Banking Corp. vs. Noble Jose and Lichauco &Co., 51 Phil. 763; Asia Banking
Corp vs.. Corcuera, 51 Phil. 781.)

Art.1383. the action for rescission is subsidiary; it cannot be instituted except

when the party suffering damage has no other legal means to obtain reparation
for the same. (1294)

Nature of Action for Rescission

Rescission is not a principal remedy. It is only subsidiary, meaning that it can be
availed of only if the injured party proves that he has no other legal means aside from
rescinding the contract to obtain redress for the damage caused (see Art. 1177.) even if
the contract is covered by Article 1381.

Art. 1384. Rescission shall be only to the extent by the ward or absentee,
rescission cannot take place. (see Art. 1355, 1381.)

Extent of Rescission
The entire contract need not to be set aside by rescission if the damage can be
repaired or covered by partial rescission. The rescission shall only be to the extent of the
creditor’s unsatisfied credit. The policy of the law is to preserve or respect the contract,
not to extinguish it.

EXAMPLE:
1. G, the guardian of M, a minor, was authorized by the court to sell two parcels
of land valued at P200,000 each. G sold the two parcels to B for only P200,000.

2. S sold his only property, a parcel of land with an area of 3,000 square meters,
to B to defraud C, a creditor of S.

If the value if 1/3 of the land is sufficient to cover the damage caused to C,
then the rescission shall only be to that extent. The alienation with respect to the
2/3 portion is valid even if B acted in bad faith.

Art. 1385. Rescission creates the obligation to return the things which were the
object of the contract, together with their fruits and the price with its interest;
consequently, it can be carried out only when he who demands rescission can
return whatever he may be obliged to restore.

Neither shall rescission take place when the things which are the object of the
contract are legally in the possession of third persons who did not act in bad faith.

In this case, indemnity for damages may be demanded from the person causing the
loss. (1295)
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Rescission creates obligation of mutual restitution

When the court declares a contact rescinded, the parties must return to each other
(1) the object the contract with its fruits and (2) the price thereof with legal interest.

The clause “he who demands rescission” applies also to a third person. Of course,
if the third person has nothing to restore, the article does not apply. The law does not
require the impossible. (Memorandum of the Code Commission, March 8, 1951, p. 20.)

Thus, where a contract is rescinded on the ground that it has been entered into in
fraud of creditors, the plaintiff creditor has no obligation to return anything since he has
received nothing.

When rescission not allowed

(1) The remedy of rescission cannot be availed of it the [arty two demands
rescission cannot return what he is obliged the restore under the contract.
(par. 1.)

(2) Neither shall rescission take place if the property is legally in the possession
of a third person who acted in good faith (par. 2.), that is to say, he acquired
the property and registered it under the Torrens System in the Registry of
Property unaware of the flaw in his title or mode of acquisition. In such case,
the remedy would be to demand indemnity for damages from the person
who caused who caused the loss. (par. 3.)

EXAMPLE:
G (guardian) sold a parcel of land of M (minor) to C for P140,000 when the
true value of the land is P200,000. Upon reaching the age of majority, M can ask
for the rescission of the sale on the ground of lesion.

If the contract is rescinded, C must return the land with the fruits received by
him therefrom while M must return the P140,000 plus legal interest of 6% (now
12%) from the date the action was instituted in court. (Vercelus vs. Edano, 47 Phil.
801.) However, if M cannot return the price with the interest, he cannot rescind the
contract.

If C sells the land to D, an innocent purchaser in good faith who takes legal
possession, rescission cannot also take place. The remedy of M is so file an action
for damages against G, his former guardian.

Art. 1386. Rescission referred to in Nos. 1 and 2 of article 1381 shall not take
the place with respect to contracts approved by the courts (1296a)

Contract approved by the court

If a contract entered into in behalf of a ward or absentee has been approved by
the court, rescission cannot take place because it is valid whether there is lesion or not.

The law presumes that the court is acting in the interest of the ward or absentee
when it approves the contract inspite of the lesion. (ss Sec. 1, Rule 95, Rules of Court.)

Art. 1387. All contracts by virtue of which the debtor alienates property by
gratuitous title are presumed to have been entered into fraud or creditors, when
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the donor did not reserve sufficient property to pay all debts contracted before
the donation.

Alienation by onerous title are also presumed fraudulent when made my

persons against whom some judgement has been rendered in an instance or
some writ of attachment has been issued. The decision or attachment need
not refer to the property alienated, and need not have been obtained by the
party seeking he rescission.

In addition to these presumptions, the design to defraud creditors may be

proved in any other manner recognized by the law of evidence. (1297a)

When alienation presumed in fraud of creditors

(1) Alienation by gratuitous title.

EXAMPLE:
R made a donation of a parcel of land to E. Before the date of the donation, R
had contracted several debts. With the donation to E, the remaining property of R is
not sufficient to pay all his debts. (see Arts. 750, 759.)

Under the first paragraph, the donation is presumed fraudulent unless proved
otherwise.

(2) Alienation by enormous title. -

EXAMPLE:
Suppose in the preceding example, the contract is a sale.

Under the second paragraph, the sale to E is not presumed fraudulent. The
creditors of R must show that the conveyance will prejudice their rights. (Art. 1381,
No. 3; see Oria vs. McMicking, 21 Phil. 243.) However, the presumption of fraud
will arise in case the sale was made by R after some judgement has been issued
against him. (see De Jesus vs. G. Urrutia & Co., 33 Phil. 171.)

Art. 1388. Whoever acquires in bad faith the things alienated in fraud of
creditors, shall indemnify the latter for damages suffered by them on account
of the alienation, whenever, due to any cause, it should be impossible for him
to return them.

If there are two or more alienations, the first acquirer shall be liable first, and so on
successively.

EXAMPLE:
(1) S sold his car to B in order to void the payment of his debt to C, his creditor. B knew
of S’s purpose.

Is the sale is rescinded, B must return the car. Should the car be destroyed with
or without his fault, then C is entitled to be indemnified for damages by B.

(2) Suppose B transferred the car to D who also acted in bad faith. Then D sold it to E
who did not know of the purpose behind the previous conveyance.

As the first acquirer, B is liable first. If he cannot pay, then D will be liable.
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ART. 1389. The action to claim rescission must be commenced within four
years. (PRESCRIPTIVE PERIOD)

For persons under guardianship and for absentees, the period of four years
shall not begin until the termination of the former’s incapacity, or until the
domicile of the latter is known. (1299)

Period for filing action for rescission

As a general rule, the action to claim rescission must be commenced within four years
from the date the contract was entered into. The exceptions are:

(1) For persons under guardianship, the period shall begin from the termination of
incapacity; and
(2) For absentees, from the time the domicile is known.

Person entitled to bring action

The action for rescission may be brought by:

(1) The injured party or the defrauded creditor;

(2) His heirs, assigns, or successors in interest; or
(3) The creditors of the above entitled to subrogation.

 VOIDABLE CONTRACTS

Art. 1390. The following contracts are voidable or annullable, even though
there may have been no damage to the contracting parties:

(1) Those where one of the parties in capable of giving consent to a contract;
(2) Those where the consent is vitiated by mistake, violence, intimidation,
undue influence or fraud.

These contracts are binding, unless they are annulled by a proper action in
court. They are susceptible of ratification. (n)

Voidable or annullable contracts are those which possess all the essential requites
of a valid contract, or consent but one of the parties is incapable of giving consent, or
consent is vitiated by mistake, violence, intimidation, undue influence, or fraud.

Binding force of Voidable Contracts

They are valid and binding between the parties unless annulled by a proper action
in court by the injured party.

Kinds of Voidable Contracts

A contract otherwise legal in object and operation is voidable because of a defect cause
by either:

(1) Legal incapacity to give consent, where one of the parties incapable of giving
consent to the contact; or
(2) Violation of consent, where the vitiation is done by mistake, violence, intimidation,
undue influence, or fraud.
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Meaning of Annulment
Annulment is a remedy provided by law, reason of public interest, for the
declaration of the inefficacy of a contract based on a defect on vice in the consent of one
of the contracting parties in order to restore them their original position in which they were
before the contract was executed.

Art. 1391. The action for annulment shall be brought within four years.

This period shall begin:

In case intimidation, violence, or undue influence, from the time the defect of
the consent ceases.

In case of mistake or fraud, from the time of the discovery of the same.

And when the action refers to contracts entered into by minors or other
incapacitated persons, from the time guardianship ceases. (1301a )

Period for filing action for annulment

The four (4)-years for bringing an action for annulment of a voidable contract is reckoned:

(1) In cases of intimidation, violence, or undue influence. From the time intimidation,
etc., cease. Before that time the consent is still being vitiated and, therefore, the
victim cannot be expected to bring an action in court.
(2) In case of mistake or fraud, from the time it is discovered. This must be so because
before the time of renders the contract voidable (Art. 1393.) and cannot also be
expected to bring an action in court. Furthermore, the guilty party should not be
rewarded for successfully hiding the mistake or fraud.
(3) In the case of contracts entered into by minors or incapacitated persons, from the
time the guardianship ceases. An incapacitated person as no capacity to sue.

Art. 1392. Ratification extinguishes the action to annul o avoidable contract.

(1309a)

Meaning and Effect of Ratification

(1) Ratification means that one voluntarily adopts or approves some defective or
unauthorized act or contract which, without his subsequent approval or consent,
would not be binding on him. It indicates an intention on the part of the ratifier to
be bound to the provisions of the contract.
(2) Ratification cleanses the contract from all its defects from the moment it was
constituted. (Art. 1396.) the contract thus becomes valid. (rt. 1390.) Hence, the
action to annul is extinguished. (Art. 11392.)

Art. 1393. Ratification may be effected expressly or tacitly. It is understood that

there is a tacit ratification if, with knowledge of the reason which renders the
contract voidable and such reason having ceased, the person act which
necessarily implies an intention to waive his right. (1311a)

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Kinds of Ratification
They are:
(1)Express. - when the ratification is manifested in words in writing; or
(2)Implied or tacit.- it make take diverse forms, such, as by silence or acquiescence;
by acts showing adoption or approval of the contract; or by acceptance and retention
of benefits flowing therefrom. (see Cadano vs. Cadano, 49 SCRA 33.)

Requisites of Ratification
(1) The requites for implied ratification are the following:
(a) There must be knowledge of the reason which renders the contract voidable;
(b) Such reason must have ceased; and
(c) The injured party must have executed an act which necessarily implies an
intention to waive his right.

EXAMPLE:
(1) S, a minor, sold his land to B. upon reaching the age of majority, S, with full
knowledge of hi rights in the premises, instead of repudiating the contract,
disposed of the greater party of the proceeds, or collected the unpaid
balance of the purchase price from B. in case, there is tacit ratification by
S.
(2) The requites for express ratification are the same as those for implied
ratification are the same as those for implied ratification except that the
former is effected expressly.

Art. 1394. Ratification may by effected by the guardian of the incapacitated

person. (n)

(1) A contract entered into by an incapacitated person may be ratified by:

(a) The guardian; or
(b) The injured party himself provided he is already capacitated.
(2) In case the contract is voidable on the ground of mistake, etc., ratification
can be made by the party whose consent is vitiated.

Art. 1395. Ratification does not require the conformity of the contracting party
who has no right to bring the action for annulment. (1312)

Art. 1396, ratification cleanses the contract from all its defects from the moment
it was constituted. (1313)

EXAMPLE:
(1) B forced S to sell the latter’s horse. Later, the horse gave birth of to a colt. If
S should ratify the contract after the birth of the colt, who is entitled to the
colt? S, because ratification has a retroactive effect. It validates the contract
from the date of its execution.
If the horse had been sold by B to C who acted in good faith, the
subsequent ratification by S of the sale to B cannot prejudice C.

Art. 1397. The action for the annulment of contracts may be instituted by all
who are thereby obliged principally or subsidiarily. However, persons who are
capable cannot allege the incapacity of those with whom they contracted; nor
can those who exerted intimidation, violence, or undue influence, or employed
fraud, or caused mistake base their action upon these flaws of the contract.
(1302a)

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Party entitled to bring an action to annul

Two different requites are required to confer the necessary capacity to bring an
action for annulment of a contract, to wit:

(1) The plaintiff must have an interest in the contact (see Art. 1311.); and
(2) The victim and not the party responsible for the defect is the person who must
assert the same.

EXAMPLE:
(1) S sold a parcel of land to B. The consent of S was vitiated by fraud. (see Art.
1390[2].) Subsequently, S sold the same lot to C.

In this case, C can bring an action to annul the sale.

(2) S sold a piece or urban land to B. On grounds provided by law, S or B can

bring an action to annul the contract, But C, an adjoining owner of S, cannot
ask for the annulment of the sale as C is not obliged principally nor
subsidiarily under the contract.

However, C may question the sale if under the law (Art. 1622.) he has right of
redemption, i.e., the right to repurchase the property from B. In this case, C would be
prejudiced, if the sale is not set aside.

NOTE: The exercise of the right of redemption by C will in effect annul be contract of sale
between S and B.

Guilty party without right to bring action

The guilty party, including his successor interest, cannot ask for annulment. This
rule is sustained by the principle that he who comes to court must come with clean hands.

Art. 1398. An obligation having been annulled, the contracting parties shall
restore to each other the things which have been the subject matter of the
contract, with their fruits, and the price with its interest, except in cases
provided by law. In obligations to render service, the value thereof shall be the
basis for damages. (1303a)

Duty of mutual restitution upon annulment

(Restitution-restoration of something lost or stolen)
(1) If the contract is annulled, the parties, as general rule, must restore to each other
(a) the subject matter of the contract with its fruits (see Art. 544, et seq.) and (b)
the price thereof with legal interest.
(2) In personal obligations (see Art. 1156.) where the service had already been
rendered, the value thereof with the corresponding interest, is the basis for
damages (par. 2.) recoverable from the party benefited by the service.

Art. 1399. When the defect of the contract consists in the incapacity of one of
the parties, the incapacitated person is not oblige to make restitution except
insofar as he has been benefited by the thing or price received by him. (1304)

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Restitution by an incapacitated person
This provision is an exception to the general rule of mutual restitution under the
preceding article. The incapacitated person is obliged to make restitution only to the extent
that he was benefited by the thing or price received by him. It results, therefore, that if he
was not benefited, he is not obliged or restore what he had received but the other
contracting party is till bound to return what he had received, whether he was benefited or
not.

An exception to the rule of mutual restitution is also provided in Article 1427. (infra.)

Art. 1400. Whenever the person obliged by the decree of annulment to return
the thing cannot do so because it has been lost through his fault, shall return
the fruits received and the value of the thing at the time of the loss, with interest
from the same date. (1307a)

EXAMPLE:
S sold his plow and carabao to B. on the petition of S, the contract was
annulled by the court. But the carabao died in the possession of B through his fault.

Under Article 1400, B must pay the value of the carabao at the time of its
death, with inters from the same date. If the carabao had given birth, the young
must also be delivered as the fruit of the said of the said animal.

Art. 1401. The action for annulment of contracts shall be extinguished when
the thing which is the object thereof is lost through the fraud or fault of the
person who has a right to institute proceedings,

If the right action is based upon the incapacity of any one of the contracting
parties, the loss of the thing shall not be an obstacle to the success of the
action, unless said loss took place through the fraud or fault of the plaintiff.
(1314a)

Extinguishment of action for annulment

(1) If the person who has a right to institute an action for annulment (Art. 1397.), will
not be able to restore the thing which he may be obliged to return in case the
contact is annulled because such thing is lost through his fraud or fault, his right
to have the contract annulled is extinguished. If the loss is not due to his fault or
fraud, Article 1402 applies.

The action for annulment shall be extinguished only if the loss is through the
fault or fraud of the plaintiff.

(2) Under the second paragraph, the right of action is based upon the incapacity of
any one of the contracting parties. Whether the right of action is based upon
incapacity or not, the rule is the same.

Art. 1402. As long as one of the contracting parties does not restore what in
virtue of the decree of annulment, he is bound to return, the other cannot be
compelled to comply with what is incumbent upon him. (1308)

EXAMPLE:
B forced S sell the latter’s horse. The contract was annulled by the court at the
instance of S.
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If the horse died through the fault of B, Art. 140 governs. If the horse died due
to a fortuitous event, S can refuse to return the purchase price. With or without the
fault of B, S, as injured party, has the right to demand the value of the horse with
damages.

 UNENFORCEABLE CONTRACTS

Art. 1403. The following contracts are unenforceable, unless they are ratified:

(1) Those entered into the name of another person by one who has been given
no authority or legal representation, or who has acted beyond is powers;

(2) Those that do not comply with the Statute of Frauds as set forth in this
number. In the following cases, an agreement hereafter made shall be
unenforceable by action, unless the same, or some note or memorandum
thereof, be in writing, and subscribed by the party charged, or by his agent;
evidence, therefore, of the agreement cannot be received without the writing,
or a secondary evidence of its contents:
a. An agreement by that its terms is not t be performed within a year from
the making thereof:
b. A special promise to answer for the debt, default or miscarriage of
another;
c. An agreement made in consideration of marriage, other than a mutual
promise to marry;
d. An agreement for the sale of goods, chattels, or things in action, at a
price not less than Five hundred pesos, unless the buyer accept and
receive part of such goods and chattels, or the evidences, or pay at the
some part of the purchase money; but when a sale is made in auction
and entry is made by the auctioneer in his sales book, at the time of the
sale, of the amount and kind of property sold, terms of sale, price,
names of the purchasers and persons on whose account the sale is
made, it is sufficient memorandum;
e. An agreement for the leasing for a longer period than one year, or for
sale of real property or of an interest therein;
f. A representation as to the credit of a third person.

(3). Those were both parties are incapable of giving consent to a contract.

Unenforceable contracts are those that cannot be enforced or given effect in a court
of law or sued upon by reason of certain defects provided by law until and unless they are
ratified according to law.

Rescissible and voidable contracts are enforceable unless rescinded or annulled:

Unenforceable contracts although valid but cannot be enforced in court unless

cured or ratified.

Kinds of Unenforceable Contract

1. Those entered into in the name of another by one without, or acting in excess of,
authority;
2. Those that do not comply with the Statute of Frauds; and
3. Those where both parties are capable of giving.
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Unauthorized contracts are those entered into the name of another person by one
who has been given no authority or legal representation or who has acted beyond
his powers.

Statute of Frauds
Statute of frauds is to counter the evil practice of giving false testimony in actions
founded on certain kinds of contracts. It attempted to deal with the prevalence of
successful perjury by making specified contracts unenforceable unless evidenced in a
prescribe manner. It is also a legal concept that requires certain types of contracts to be
executed in writing. The statute covers contracts for the sale of land, agreements involving
goods worth over P 5,000.

Statute of frauds has been enacted not only to prevent fraud but also to guard
against the mistakes of honest men by requiring that certain agreements specified (under
Art. 1403 No.2) that are susceptible to fraud must be in writing. (Shoemaker vs. La
Tondena, Inc. 68 Phil. 24)

The stature of frauds does not require that the contract be contained in a formal
written document. The writing may be embodied in a slip of paper, a letter, a note or
memorandum by means of a pen, a pencil, or any mechanical device as long as it is
intelligible and records the intent of the parties.

Application
1. The Statute of frauds is not applicable inactions which are neither for damages
because of a violation of a contract, nor for the specific performance thereof.
(Factoran vs. Sabanal, 81 Phil. 513; Lim vs. Lim 10 Phil 635). Statute of frauds
is applicable only to completely executory contracts, and not to contracts which
are totally executed (contract is consummated) or partly executory (contract is
partially performed)

2. The Statute of Frauds is not applicable where the contract is admitted expressly,
or impliedly, or by the failure to deny specifically its existence, no further
evidence thereof being required in such case. The Statute of Frauds is
applicable only in an agreement enumerated under Art. 1403 No. 2.

3. The Statute of Frauds is not applicable where a writing does not express the
true agreement of the parties. This is so because the Statute cannot be used
as a shield for fraud or as a means for the perpetration of it. (Cuyugan vs.
Santos, 34 Phil. 100)

The Statute of Frauds does not declare that contracts infringing it are void but
merely unenforceable. (Art. 1403 No.2)

The defense of the Statute of Frauds may be waived. (Art. 1405)

The defense of the Statute of Frauds is personal to the parties and cannot be
interposed by strangers to the contract. (Art. 1408)

To be enforceable a contract does not have to be in writing. In fact, most contract

made orally are legally enforceable.

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The enumeration below are the agreements within the scope of the Statute of
Frauds, although valid, but cannot be enforced, unless in writing.

1. Agreement not to be performed within one (1) year from the making thereof.
Example: On October 20, 2014, S entered an oral contract with B for the
construction of B’s house to begin on October 20, 2015. The contract must be in
writing to be enforceable.
2. Promise to answer for the debt, default, or miscarriage of another.
Example: D owes C P50,000 with G guarantor. Here G has a special promise to
answer for the debt of D in case D fails to pay the debt. The promise is
unenforceable unless it is in writing signed by G.
3. Agreement in consideration of marriage other than mutual promise to marry.
Example: M agrees to build a house worth 5,000,000 for W if W will marry M. Tis
must be in writing to be enforceable unless M ratifies the agreement. The statute
applies even when the promise to build the house is made by a third person to W.
4. Agreement for sale of goods, etc. at the price not less than P500.00.
Example: S (seller) and B (buyer) mutually promise to sell and buy a piano. The
contract must be in writing to be enforceable against either party unless there is
delivery or partial or full payment, in which case it is taken out of the operation of
the Statute of frauds and the may be enforced even if it was made orally. S if denies
a contract of sales of goods worth P500 but B claims the price is only P450 (less
than 500) oral evidence of the sale is admissible inasmuch as the true agreement
claimed is not is not covered by Statute.
5. Agreement for leasing for a long period
Example: R agrees to lease his house to E for two (2) years. Again this agreement
must appear in
writing to be enforceable unless partially executed.
6. Agreement for the sale of real property or of an interest therein.
Example: S agreed in a private document to sell his land to B. The document was
given to B who lost it. May B prove the agreement by oral evidence? YES. Here,
what is to be proved is not an oral but a written contract of sale. It is necessary,
however, that B first present proof that the written agreement really existed.

Article 1404. Unauthorized contract is governed by article 1317.

Article 1405. Contracts infringing the Statute of Frauds, referred to Art. 1403 No. 2
are ratified by the failure to object to the presentation of oral evidence to prove the same,
or by the acceptance of benefits under them.

Modes of ratification under the statute

1. By failure to object to the presentation of oral evidence to prove the contract. Failure
to object is the waiver and makes the contract binding as if it has been reduced to
writing.
2. By acceptance the benefits under the contract. In this case, the contract is no longer
executor and, therefore the Statute does not apply. The rule is based upon the
familiar principle that the one who has enjoyed the benefits of a transaction should
not be allowed to repudiate its burden.

Art. 1406. When a contract is enforceable under the Statute of Frauds, and a
public document is necessary for its registration in the Registry of Deeds, the
parties may avail themselves of the right under Art. 1357.

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For the application of the provision, there must be a valid agreement and the
agreement must not infringe the Statute of Frauds.

Art. 1407. In a contract where both parties are incapable of giving consent,
express or implied ratification by the parent, guardian as the case may be, of
one of the contracting parties shall give the contract the same effect as if only
one of them were incapacitated.
If ratification is made by the parents or guardians, as the case may be, of
both contracting parties, the contract shall be validated from the inception.

When unenforceable contract becomes a voidable contract

Where both parties to a contract are incapable of giving consent, the contract is
unenforceable. However, if the parent or guardian of, either party, or if one of the partier
attaining or gaining capacity, ratifies the contract, it becomes voidable.

When unenforceable contract becomes a valid contract

If the ratification was made by the parents or guardians, as the case may be, of the
both contracting parties, or by both contracting parties after attaining or gaining capacity,
the contract is validated and its validity retroacts to the time it was entered into. (see Art.
1396)

Art. 1408. Unenforceable contacts cannot be assailed by third persons

 VOID OR INEXISTENT CONTRACT

Art. 1409. The following contracts are in existent and void from the beginning:

(1) Those whose cause, object or purpose is contrary to law, moral, good
customs, public order or public policy;
(2) Those which are absolutely simulated or fictitious;
(3) Those whose cause or object did not exist at the time of the transaction;
(4) Those whose object is outside the commerce of men;
(5) Those which contemplate an impossible service;
(6) Those where the intention of the parties relative to the principal object
of the contract cannot be ascertained;
(7) Those expressly prohibited or declared void by law. These contracts
cannot be ratified. Neither can the right to set up the defense of illegality
be waived.

Void Contracts are those which, because of certain defects, generally produce no
effect at all.

Inexistent Contracts refer to agreement which lack one or some or all of the elements
(i.e. consent, object, and cause) or do not comply with formalities which are essential for
the existence of a contract. Both Void Contracts and Inexistent Contracts are
unenforceable.

Art. 1410. The action or defense for the declaration of the inexistence of a
contract does not prescribe.

Although the contract is void or inexistent, it is necessary to secure judicial

declaration of nullity to give peace of mind to the parties and avoid the taking of law into

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their own hands. To file a petition for nullity or defense cannot be prescribed. It can be
filed anytime in the court despite the passage of time. (imprescriptible)

Art. 1411. When the nullity proceeds from the illegality of the cause or object
of the contract, and the act constitutes a criminal offense, both parties being in
pari delicto, they shall have no action against each other, and both shall be
prosecuted. Moreover, the provision of the Penal Code relative to the disposal
of effects or instruments of a crime shall be applicable to the things or the price
of the contract.

This rule shall be applicable when only one of the parties is guilty; but the
innocent one may claim what he has given, and shall not be bound to comply
with his promise. (1305)

Pari delicto (equally guilty)

Under this article, when the parties entered into a contract, and agreed to the
illegality of the cause or object (essential requisites) both of them are in pari delicto or
guilty. They can not file a case against each other and the things or price of the contract,
shall be confiscated in favor of the government. Example: S sold to B contraband article
for P 10,000. B paid only P1,000 and S did not deliver the item. Since the contraband is
illegal, both of them are guilty (pari delicto) they do not have action against each other and
will be prosecuted. The goods will be forfeited in favor of the government.

Art. 1412. If the act in which the unlawful or forbidden cause consists does not
constitute a criminal offense, the following rules shall be observed:

(1) When the fault is on the part of both contracting parties, neither may
recover what e has given by virtue of the contract, or demand the
performance of the other’s undertaking;
(2) When only one of the contracting parties is at fault, h cannot recover
what he has given by reason of the contract, or ask for the fulfilment of
what has been promised him the other, who is not at fault, may demand
the return of what he has given without any obligation to comply with
his promise.

Rules where contract is illegal but the act does not constitute criminal offense
1. Where both parties are in pari delicto. --- If the cause of the contract is unlawful
of forbidden but there is no criminal offense, the rules are as follows;
(a) Neither party may recover what he has given by virtue of the contract; and
(b) Neither party may demand the performance of the other’s undertaking

EXAMPLE:
X agreed to live as the common-law wife of Y in consideration of the promise
on the part of Y to donate a land to X. Here, the promise of Y has for its
consideration an immoral act which does not constitute a crime.

2. Where only one party is guilty. --- If only one party is guilty or both parties are
not equally guilty, the following are the rules:
(a) The guilty party loses what he has given by reason of the contract;
(b) The guilty party cannot ask for the fulfillment of the other’s undertaking ;
(c) The innocent party may demand the return of what he has given;
(d) The innocent party cannot be compelled to comply with his promise.

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ARTICLES 1411 and 1412 embody the general principle that when both parties
are in pari delicto, the law refuses them every remedy and leaves them where they are.
However, there are exceptions to this rule, some of which are contained in ARTICLES
1413 to 1419.

Art. 1413. Interest paid in excess of the interest allowed by the usury laws may
be recovered by the debtor, with interest thereon from the date of the payment.

Recovery of usurious interest

Any rate interest in excess of the maximum allowed under the Usury Law is usurious
and if paid, may be recovered together with interest thereon from the date of payment in
proper action for the same. (Art. 1413.)

A stipulation for the payment of usurious interest is void. The person paying the
usurious interest can recover in a civil action not only the interest in excess of that allowed
by law, but the whole interest paid. (Angel Jose Merchandising vs. Childa Enterprises and
D. Syjuico, 23 SCRA 199; see Arts. 1175, 1957; Sec 6, Usury Law; see NOTE under Art.
1175.)

Art. 1414. When money is paid or property delivered for an illegal purpose, the
contract may be repudiated by one of the parties before the purpose has been
accomplished, or before any damage has been caused to a third person. In
such case, the courts may, if the public interest will thus be subserved, allow
the party repudiating the contract to recover the money or property.

Recovery where contract entered into for illegal purpose

EXAMPLE:
In consideration of P1,000 paid by A to B, the latter promised to hide C, who is
accused of murder. Before B could hide C, A changed his mind. In this case, the
court may allow A to recover the P1,000 given to B.

Art. 1415. Where one of the parties to an illegal contract is capable of giving
consent the courts may, if the interest of justice so demands, allow recovery of
money or property delivered by the incapacitated person.

Recovery by an incapacitated person

This article is another exception to the in pari delicto rule in Articles 1411- 1412.
Recovery can be allowed if one of the parties is incapacitated and the interest of justice
so demands.

EXAMPLE:
In the preceding example, if A is a minor ir an insane person, the court may allow
A to recover the money paid if the interest of justice so demands.

Art. 1416. When the agreement is not illegal per se but is merely prohibited,
and the prohibition by the law is designed for the protection of the plaintiff, he
may, if public policy is hereby enhanced, recover what he has paid or delivered.

Recovery where contract not illegal per se

Article 1416 is another exception to the rule that where both parties are in pari
delicto, they will be left where they are without relief. Recovery is permitted.

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1. The agreement is not illegal per se but is merely prohibited;
2. The prohibition is designed for the protection of the plaintiff; and
3. Public policy would be enhanced by allowing the plaintiff to recover what he has
paid or delivered.

Art. 1417. When the price of any article or commodity is determined by statute, or
by authority of law, any person paying any amount in excess of the maximum price
allows may recover such excess.

Recovery of amount paid in excess of ceiling price

A statute fixing the maximum price of any article or commodity is usually known as
the ceiling law. It can also be determined by authority of law, as by Executive Order of the
President. Its purpose is to curb the evils of profiteering or black marketing.

Art. 1418. When the law fixes, or authorizes the fixing of the maximum number
of hours of labor, and a contract is entered into whereby a laborer undertakes
t work longer than the maximum thus fixed, he may demand additional
compensation for service rendered beyond the time limit.

Recovery of additional compensation for service rendered beyond time limit

Art. 1419. When the law sets, or authorizes the setting of a minimum wage for
laborers, and a contract is agreed upon by which a laborer accepts a lower
wage, he shall be entitled to recover the deficiency.

Recovery of amount of wage less than minimum fixed

If an employee receives less than the minimum wage rate, he can still recover the
deficiency with legal interest (see Art. 128, Pres. Decree No. 442, as amended.), and the
employer shall be criminally liable. (see Arts. 278, 279 ibid.)

Art. 1420. In case of a divisible contract, if the illegal terms can be separated
from the legal ones, the latter may be enforced.

Effect of illegality where contract indivisible/divisible

1. When the consideration is entire and single, the contract is indivisible so that if part
of such consideration is illegal, the whole contract is void and unenforceable.
2. Where the contract is divisible or severable, that is, the consideration is made up
of several parts, and the illegal ones can be separated from the legal portions, the
latter may be enforced. The rule, however, is subject to the contrary intention of the
parties.

EXAMPLE:
S sold to B his car and shabu, a prohibited drug, for P200,000.

The contract is wholly void and unenforceable because there is only one
consideration for both the car and the shabu.

However, if the price of the car is P150,000 and that for the shabu is
P50,000, the contract, being divisible, is valid as to the sale of the car.

Divisible contract distinguished from divisible obligation

It must be noted that Article 1420 speaks of a divisible contract and not of a divisible
obligation. (see Arts. 1225, 1183.)

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The test of the former is the divisibility of its cause, while the later, its susceptibility
of partial fulfillment. The prestation of object.

EXAMPLE:
S paid P1,000 as annual subscription to a weekly magazine to be delivered
every week. The contract of subscription is indivisible but the publisher is divisible.

Art. 1421. The defense of illegality of contracts is not available to third persons
whose interests are not directly affected.

Only the affected person in the contract has the personality to raise a question
before the court

Art. 1422. A contract which is the direct result of a previous illegal contract, is
also void and inexistent.

Void contract cannot be novated

This provision is based on the requisites of a valid novation. ( see comments and
examples under Art. 1298.) An illegal contract is void and inexistent and cannot, therefore,
give rise to a valid contract.

For example, a contract of repurchase is dependent on the validity of the contract

of sale. If the latter is itself void because the seller is not owner, the former is also void
because it presupposes a valid contract of sale between the same parties.

Activity

For supplemental discussion of the topic, please check the link below:

https://www.youtube.com/watch?v=E6x4L1MqSV4

Exercise

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